AGT Looks Undervalued, But This Pulse Business Has Taken A Pounding

As I have written in the past, one of the hardest parts of “buy the pullback” advice is that it sometimes leads you to grab at falling knives. Such has been the case with AGT Food and Ingredients (OTCPK:AGXXF) (AGT.TO), where the shares have fallen another 20% since my mid-May update as management (and I) seriously underestimated the depth and breadth of the business downturn spurred by a robust 2017 pulse crop in India.

Feeble volumes have hammered margins in the traditional pulse processing and handling/distribution operations, while the company’s food and ingredients businesses are not yet large enough to do much more than slightly cushion that blow. This company has been through this before, with the last serious downturn in 2012, and there are some reasons to think that business will bottom out in the second half of 2017. Even if that’s the case, though, it seems unlikely that 2018 is going to be a “business as usual” year and investors have to consider the long run of negative free cash flow here, as well as the debt situation and management’s sometimes-questionable strategic priorities and decisions.

I may be a glutton for punishment here, but I’m keeping this on my watchlist. A long-term revenue growth rate of 5%, underpinned by ongoing global growth in pulse consumption and growth in pulse-derived ingredients, and a mid-single-digit FCF margin can support a fair value about 15% higher than today’s price. I’m not buying today, though, as I would like to see fourth quarter results before making a commitment.

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AGT Looks Undervalued, But This Pulse Business Has Taken A Pounding